Finance
primary market
new market. shares of stock are first brought to the market and sold to investors.
maturity
number of years until the face value is paid
Put Bond / Tender Option Bond
- Allows the holder of the bond to "put" or redeem the bond back to the issuer at par on stated dates - Usually done if prices declined or yields rose
cat bonds
1. Catastrophe bonds. 2. Transfers specific risk from issuers, typically insurance or reinsurance companies, to investors
shareholder rights
1. the right to share proportionally in dividends paid 2. the right to share proportionally in assets remaining after liabilities have been paid in liquidation 3. the right to vote on stockholder matters of great importance preemptive: stockholders will have an opportunity to buy stock before it is offered to the general public
cumulative voting
all directors are elected at the same time. number of shares * number of directors to be elected. allows for minority participation
sinking fund
an account managed by the bond trustee for the purpose of paying bonds
Structured Notes
bonds based on stocks, bonds, commodities, or currencies
broker
brings buyers and sellers together
convertible bonds
can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option
floating rate bonds
coupon rates are adjustable.
straight voting
directors are elected one at a time. does not allow for minority opinion. The person with the most votes will select the candidates.
Inflation and Present Values
discount nominal cash flows at nominal rate or discount real cash flows at real rate. both will get same answer
secondary market
existing shares are traded among investors
proxy voting
grant of authority by a shareholder to someone else to vote his or her shares
Reverse Convertible Bonds
high coupon rates, income portion of the bond return will be high, the potential loss in par value could easily erode the extra return
cumulative or noncumulative
if a dividend is not paid in a particular year, they will be carried forward as an arrearage
stated value
liquidating value is usually $100. "$5 preferred" translates into a dividend yield of 5 percent of stated value
dealer
maintains an inventory and stands ready to buy and sell at any time
staggering votes
only a fraction of dictatorships are up for election. 1. staggering makes it more difficult for a minority to elect a director 2. makes takeover attempts less likely to be successful because it is more difficult to vote in a majority of new directors
zero coupon bonds
pays no coupons at all. must be offered at a price that is lower than its stated value
death bond
purchased from individuals expecting to die in the next 10 years. so that when they do they get paid back. greater life expectancy decreases return to bondholder
real rates
rates that have been adjusted for inflation
nominal rates
rates that haven't been adjusted for inflation
coupon
regular interest payments that a person promises to make
dividends
represent a return on the capital directly or indirectly contributed to the corporation or shareholders - dividends are not liabilities - it is not a business expense - dividends are taxable
shareholder rights
shareholders control the corporation through the right to elect directors. Directors hire managers to carry out their directives.
municipal / state bonds
state and local governments are borrowing money. exempt from federal income taxes varying degrees of risk
common stock
stock that has no special preference either in receiving dividends or in bankruptcy
term structure of interest rates
tells us what nominal interest rates are on default free, pure discount bonds of all maturities
face value or par value
the amount that will be repaid at the end of the loan
coupon rate
the annual coupon divided by the face value
preferred stock
the holders of preferred shares must receive a dividend before holders of common shares are entitled to anything
Fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate
yield to maturity
the rate required in the market on a bond
interest rate risk
the risk that arises for bond owners from fluctuating interest rates 1. the longer time to maturity the greater the interest rate risk 2. the lower the coupon rate the greater the interest rate risk
level coupon bond
when a bond is constant and paid every year
treasury notes or government bonds
when government wishes to borrow money. have no default risk. exempt from state income taxes
inverse relationship between interest and present value of bond
when the interest rate rises the present value of a bond declines and vice versa